UPS Earnings: Europe Trade Growth Drives Earnings

July 31st, 2015 by Trefis Team
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UPS: United Parcel Service logo
UPS
United Parcel Service

United Parcel Service (NYSE:UPS) announced its second quarter earnings results on Tuesday, July 28. [1] The company reported a 12% increase in its second quarter earnings per share to reach $1.35, compared to consensus estimates of $1.27, as margins improved significantly at its international package volumes increased on Europe trade. [2] UPS’s Domestic Package’s margins suffered due to weak fuel surcharge revenues. However, investors were pleased with the double digit earnings growth, which helped the stock rise 5% on the day earnings were released.

The company’s second quarter revenue declined 1.2% year-on-year, to reach $14.1 billion, due to foreign currency headwinds and lower fuel surcharge revenues. Excluding the impact of foreign currency, the top line grew 1%. The company’s efforts to improve profitability and fuel tailwinds paid off during the quarter, with operating income increasing to $1.96 billion, compared to adjusted operating income of $1.81 billion in the prior year period.

For 2015, UPS expects its earnings per share to track the higher end of its guidance of a 6-12% increase, to $5.05-5.30, with its total shipments per day rising 3-4%. UPS’ top line will likely continue to grow 5-6% on e-commerce volumes.

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Strong International Volumes Drive Operating Profits

UPS’ International Package operating margin improved 3.6% as volume grew a strong 5.5%, primarily driven by intra-Europe shipments. [2] In the quarter ended May, intra-EU exports increased 9.2% and imports increased 8.4%. [3] This helped drive an 8.5% increase in UPS’s  intra-Europe shipments. As a result of the stronger U.S. dollar, U.S. imports from the European Union were 54% higher than exports during the quarter ended May, which led to slower growth in UPS’ export packages from the U.S. [4]

We expect to see continued growth in package volume in Europe, which should drive UPS’ international package volumes. In order to support this growth, UPS has been actively investing in the region. Recently, UPS doubled the capacity of its Nuremburg hub, which is an important link between West and East Europe. In April, UPS announced that it intends to invest $1.06 billion in the region, which should help increase its presence. [5]

Another reason to focus on the European region is FedEx’s acquisition of TNT. In April, FedEx (NYSE:FDX) announced that it had offered to purchase TNT Express. [6] FedEx’s TNT acquisition should lead to a massive increase in its market share in Europe. According to 2013 data, FedEx is one of the smallest logistics companies in Europe with a market share of 5%. [7] DHL leads with 19%, followed by UPS at 16% and TNT at 12%. Once the deal closes by the first half of 2016, subject to regulatory approval, FedEx would become the second largest logistics player in Europe, threatening UPS’ position in the region.

Low Fuel Surcharge Revenue Offsets Impact Of New Pricing Mechanism

In June 2014, UPS announced that starting in December 29, dimensional weight would be used to calculate the billable price of all ground packages in the U.S. and standard packages to Canada. [8] The shift to dimensional weight pricing helped increase UPS’ domestic operating profits by 3.0% as its margins improved 10 basis points. [2] The improvement in margins and profits would likely have been higher, if it wasn’t for the decline in fuel surcharge revenues. UPS’ domestic revenue per package was flat in the second quarter due to a 300 basis point negative impact of decline in fuel surcharge revenue.

In the coming quarters, we expect to see continued growth in UPS’ domestic volumes driven by continued growth in e-commerce packages. U.S. e-commerce sales grew 14.5% year-on-year in the second quarter and are expected to grow around 14% in 2015. [9] E-commerce package growth will be complimented by UPS’ new pricing mechanism and revised rates. However, the risk of decline in fuel surcharge revenues will remain, which could potentially offset the benefits from increase in pricing.

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Notes:
  1. UPS Delivers 12% EPS Growth, July 28, 2015, UPS Financial News Release [↩]
  2. UPS’s 2015 Q2 Financials, July 28, 2015, UPS Quarterly Results [↩] [↩] [↩]
  3. In nominal terms exports increased by 8.0% and imports increased by 11.0%, July 10, 2015, Instituto Nacional De Estatistica News Release [↩]
  4. Trade in Goods with European Union, U.S. Census Bureau Foreign Trade Data [↩]
  5. UPS to invest $1.06 billion in Europe: Wirtschaftswoche, April 12, 2015, Reuters [↩]
  6. FedEx and TNT Express Agree on Recommended All-Cash Public Offer for All TNT Express Shares, April 7, 2015, FedEx News Release [↩]
  7. FedEx agrees to buy TNT Express for €4.4bn, April 7, 2014, www.ft.com [↩]
  8. UPS Announces Dimensional Weight Changes, June 17 2014, www.ups.com [↩]
  9. Retail Sales Worldwide Will Top $22 Trillion This Year, December 2014, Emarketer Newsletter [↩]